A constant perpetuity with cash flow, C, will have the first cash flow occur exactly 19 years from now. Each subsequent cash flow will be exactly 6 years after the prior cash flow. You have used the formula, PV=C/r (correctly) to determine a value. The determined value needs to be discounted exactly how many years to get the PV today of the cash flows?

 You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last

17 years. You expect that the drug's profits will be $1 million in its first year and that this amount will grow at a rate of 6% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 8% per year?

 Your oldest daughter is about to start kindergarten in a private school. Tuition is $10,000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 6% per year over the 13 years of her schooling. What is the present value of your tuition payments if the interest rate is 6% per year? How much would you need to have in the bank now to fund all 13 years of tuition?

 A rich aunt has promised you $3,000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 5% larger than the last payment. She will continue to show this generosity for 30 years, giving a total of 30 payments. If the interest rate is 5%, what is her promise worth today?

 You are running a hot Internet company. Analysts predict that its earnings will grow at 20% per year for the next five years. After that, as competition increases, earnings growth is expected to slow to 5% per year and continue at that level forever. Your company has just announced earnings of $1 million. What is the present value of all future earnings if the interest rate is 10%?

(Assume all cash flows occur at the end of the year.)

 A constant perpetuity with cash flow, C, will have the first cash flow occur exactly 19 years from now. Each subsequent cash flow will be exactly 6 years after the prior cash flow. You have used the formula, PV=C/r (correctly) to determine a value. The determined value needs to be discounted exactly how many years to get the PV today of the cash flows?

 Your brother has offered to give you $145, starting next year, and after that growing at 2.9% per year for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in a local bank so that the amount will generate the same cash flows as he is offering you. Your local bank will guarantee a 5.9% annual interest rate so long as you have money in the account. a. How much money will you need to deposit into the account today? b. Assuming you deposited the amount of money in part

(a), and then withdrew the required payments each year, calculate the remaining balance at the end of years 1, 2, 10 and 19. (Hint: To solve this problem it is best to use an excel spreadsheet.)